Download China s International Future

China’s International Future
Odd Arne Westad
O
ver the past two decades China has become integrated in the world economy to an extent
unprecedented in the country’s history. When foreign investment returned to China in
the early 1990s, after the shocks of the Tiananmen events, it was at a pace and level never
seen before. The combination of a dedicated and cheap workforce and the hope of buying
into China’s own domestic development led to the country leap-frogging all others in terms of
foreign direct investment (FDI). Over the course of the whole decade China was second only
to the United States in attracting FDI – a remarkable change, given that foreign investment of
any kind had not existed in China prior to 1980. Up to today the changes in China’s economic
system have to a large extent been driven by the needs created by foreign investors. For
instance, a legal framework of ownership had to be created to serve those who wanted to
invest in China. The same framework could then serve China’s own embryonic capitalists.
Similarly for stock exchanges, insurance arrangements, and quality control. China’s bid to join
the World Trade Organisation (WTO), which finally succeeded in 2001 (very much thanks to the
goodwill of the United States), was intended to serve China’s export potential, but also made
the country sign up to stringent regulations concerning state subsidies (or rather the absence
thereof), industry standards, copyright protection, and not least opening the Chinese market
to foreign competition. The international drove the domestic in terms of economic change.
By 2000 the socialist economy in China had lost out to a market economy encouraged by a party
dictatorship that was still Communist in name. For China’s population it was clear that they were
living in a new society in which market forces were dominant. State-owned enterprises were sold off,
downscaled, or allowed to go bankrupt (at least 5,000 such companies have gone bankrupt each year
since 2000). Those that survived are publicly listed and under the same management regulations as all
other Chinese companies. For ordinary people this rearrangement means that employers that may not
have paid them much money, but otherwise looked after them and their children from the moment the
state assigned them to the factory to the day they died, were now a thing of the past. No more free
healthcare, kindergartens, schools, housing, holidays, or homes for the elderly. Instead, people had to
– gingerly – enter a private housing market, search for a good job, and save for their children’s college
education. Millions of people had to travel elsewhere to find work. China’s capitalism, when it finally
broke through in the 1990s, was very unlike the European and the Japanese variants, with their safety
nets and entitlements, but remarkably like that of the United States, with its emphasis on mobility,
opportunity, and personal responsibility.
But it was not only the Chinese population that had to learn a new way of living in the 1990s and 2000s. The
state had to learn, too. Having given up direct ownership of the economy, it had to create new instruments of
indirect control, most of them borrowed whole-sale from the West and based on legislation, regulation, and
fiscal and monetary policy. It was, in many ways, a return to China’s preoccupations of the inter-war period,
only with a much larger segment of the population involved in the industrial economy. Some critics called it
a counter-revolution, since the state increasingly saw its main task as serving market-led economic growth.
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By the 2000s the Chinese Communist state had
adopted concerns about inflation, interest rates, credit
flows, and property rights that sounded very similar
to those of Reaganite America or Thatcherite Britain
in the 1980s. Capitalism was in the driver’s seat, even
if CCP leaders would not admit it, and the role of
the state in advanced capitalist economies – minus
electoral democracy – was what Beijing was aiming
for. China’s capitalist revolution of the past twenty
years has brought the country closer to the outside
world – and especially to the United States – in terms
of the aims many people set for themselves or how
the Chinese state operates than ever before, or at least
since the Mongol dynasties of the thirteenth century.
Why did the party do it? Founded on an anti-capitalist
creed in a China in which many people – not only
Communists – felt that capitalism had brought nothing
but suffering, exploitation, and humiliation, the move
from Maoism to market demanded a remarkable
turn-around not just in ideology but also in mentality.
For critics of the CCP inside and outside of China the
answer is simple: the party’s much lauded ‘flexibility’
was a consequence of its long history of manipulating
the truth and deceiving those who believed in it. Party
leaders embraced capitalism to enrich themselves and
their families, and because the plans for the future
they had once promoted had utterly failed. There is
obviously some truth to these presuppositions, but they
are far from the whole truth. The main reason why
the CCP chose the market was that from the position
of the early 1990s there seemed to be no other way
out. Modernity was capitalist. The USSR had – very
unexpectedly for the Chinese – collapsed, as had the
socialist states in Eastern Europe. The United States led
the way towards an increasingly integrated capitalist
world economy, and those who opted out of it would
fall behind. The risk of falling behind was what first
and foremost animated China’s leaders from Deng
Xiaoping to Hu Jintao. If the race to modernise could
be better run with Nike trainers, then the Chinese
Communists would put them on (especially if the
shoes themselves were made in China).
A new generation of returned students played a big
role in China’s capitalist transformation. Even though
a very large number of Chinese who had studied
abroad wanted to remain abroad in the 2000s, those
who did go back to China had the expertise and
the status to begin introducing new practices, first,
in private enterprise, and, second, in the state and
even in the party. By the late 2000s one could get the
impression that the CCP itself had taken over many
of the management methods of foreign enterprises:
quantifiable results for young party brass were all the
rage among the top cadres of the party. One highlevel CCP member described his training at the party
academies in terms that anyone with a MPA or MBA
from Harvard or LSE would recognise. At the same
time foreign educated academics are transforming
China’s own higher education. Research output is
crucial to promotion, and the output is supposed to
be of international standard. Student concerns are
increasingly taken seriously by their professors (since
they are paying customers). When party control and
academic ambition collide, it is as often the latter that
wins out as the former.
While consumer choice meant nothing in China before
the late 1980s, it now means a lot to most Chinese,
even those who live far from the main cities. The
preoccupations are very similar to those of the preWorld War II era: how can modernity – preferably of
an international kind – be best expressed in terms of
products. Young people in China today are among
the most fashion- and brand-conscious in the world.
Foreign-produced goods generally have the edge,
even though some Chinese brands are beginning
to catch up. Music is often American, with liberal
doses of Canto-pop thrown in. Clothes styles and
hair styles are Western, mediated through Hong Kong
and Taiwan. For other products, concerns such as
environmentalism or sustainability are beginning to
find their way in, but not on key issues that really
matter to the Chinese consumer, such as buying a
car. In China – the world’s largest market for new cars
in 2010 – the American habit of buying the biggest
engine your pocketbook can afford is still the rule (with
predictable consequences: China today has twenty of
the thirty most polluted cities in the world).
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At ground level, mass consumption is only one part
of China’s capitalist revolution. The other is the way
people invest in the new economy. The main aim for
many in China today is to buy their own house or
apartment. In the cities it can only be done through
immensely hard work by a young couple, since
property prices are almost at European levels and
salaries are much lower. Even though the Chinese
savings rate is still very high, more and more of it
– within an extended family – contributes in one way
or the other to paying off debt. Meanwhile more and
more young Chinese are investing directly into the
market, and often find that with some sense added
to the general expansion that the Chinese economy
has gone through their investment can earn them as
much as their salary. All put together, Chinese investors
– in property and stock – are becoming increasingly
numerous, and – even though they are not likely to
be more democratic or less nationalistic than their
fellow citizens – they have, quite literally, bought into
a development pattern for China that is quite similar
to that of Western nations, or Japan or South Korea.
The one area in which China stands out from other East
Asian states, including Taiwan, in terms of development
is – ironically enough, given the pretensions of its
Communist government – the matter of equality.
While the early Communists had dreamed about a
China which was modern and strong and socially
just – and Mao had pursued the topic of equality
endlessly in his campaigns – China today is one of
the most socially stratified societies on earth. While
more than a third of the population – those who have
not joined the industrial economy – live on slightly
more than $2 income per day, China has 128 dollar
billionaires and half a million millionaires. Its Gini
coefficient (the standard used for measuring levels of
income inequality) is higher than that for any other
country in its region, and just slightly lower than the
most unequal countries on earth, such as Brazil. CCP
leaders defend themselves by quoting Deng’s maxim
that some people have to get rich first, while presiding
over increasing levels of inequality. Yet in some areas
social unrest is rising, with local organisers claiming
that the party is a tool of foreign exploitation of China.
For minorities, in Tibet and Xinjiang but also in the
south, the same party that tried to drown their identity
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in blood during the Cultural Revolution, now drowns
it in consumer products and market adjustments,
while increased mobility leads to ever more Chinese
in minority areas. Capitalism, though victorious in
China, is in no way uncontested.
The most remarkable story of China’s international
development over the past thirty years has been its reengagement with the rest of Asia. Three decades ago
China suffered a self-imposed exile from the continent
of which it is a part. Its only close relationship was with
North Korea, and even there Beijing had to compete
for position with Moscow. As if this diplomatic isolation
was not enough, China had territorial issues with all of
its neighbours (North Korea included). It was an Asian
world that seemed to have expurgated China from its
midst. The central kingdom was no longer central; it
was distinctly peripheral to the rest of the continent.
While the main reason for China’s marginality was
its own contrary politics, another key reason could
be found in the strong economic gains made by
other Asian economies while China’s own economy
stagnated. Japan had of course been the pioneer of
development in the region, with substantial growth
rates even in the early 20th century. But from 1950 to
1973 the Japanese economy grew by an average of
10 percent per year, as did Taiwan. Singapore, South
Korea, and Hong Kong all grew at 8 percent. In China
GDP per capita in 1973 was around $800. In Japan
it was $11,500, in Hong Kong $7,000, in Singapore
$6,000, and in Taiwan $4,000. China was falling
further and further behind the leading economies
in Asia, and even though most Asians would have
liked to see China open up to their exports, they did
not actually believe that it was going to happen at
any point soon.
Compare this with the situation today. China’s own
economic growth since 1980 has been spectacular,
averaging near 10 percent, and it has rejoined an
integrated East Asian system of trade, finance, and
investment. What is more, this growth has taken
place in a country that has 1.3 billion people in it;
more than double the population of the rest of East
and Southeast Asia put together. The journey that
China has been on over the past generation has been
intimately linked with its relationship to its neighbours,
first those next-door and then into the Southern and
Western parts of the continent. Indeed, China’s rise
would have been impossible without it revitalising
these links. China is now an economic powerhouse
that all of the rest of Asia orients itself towards,
and its policies on all matters are of crucial importance
for the whole region.
The development of China’s economy will be at the
center of the country’s international affairs for the next
generation, irrespective of the twists and turns in its
domestic politics or its diplomacy. The reason for this is
not only that China is now the second largest economy
in the world, but the roles it has taken on for this to
be possible. China is today the world’s workshop,
the zone where things are made which then end up
on the shopping lists of Americans, Europeans, and
Asians alike, and which nearly everyone else aspires
to possess. This is the country’s current role, and it
has achieved it by being willing to play the global
market game according to the rules that were set
up first by Britain in the 19th century and then by the
United States in the 20th. In spite of its government’s
nominal Communism, China has in practice become
the champion of free market capitalism, internationally
if not always internally. It is working hard to take on
the rules of the game and is increasingly concerned
that others, be it in Africa or Europe, are themselves
not always doing so. Seen from a Western perspective
it is hard not to conclude that China is now ‘playing
our game.’
But as China emerges as the master player of
international capitalism, it is also obvious that the
rules of the game are being re-made in China. In
spite of observations by sceptics, these sinified rules
so far rarely go in the direction of corporatism or
state-control, but, at best, in the direction of collective
decisions and compromise, and, at worst, in the
direction of corruption and nepotism. It is very unclear
how Chinese capitalism is going to influence practices
in other countries, especially in cases where there
are great cultural differences with China. Given the
massive amount of foreign investment that has flowed
into the country over the past decade it is a given that
over time Chinese financial practices will influence the
foreign companies that do business there. But at the
moment the Chinese are busy implementing foreign
rules, for instance on managerial and labour relations,
in ways that are profoundly changing Chinese society.
The Chinese government today wants to play a strong
regulatory role in the development of the country’s
economy. Because China is a political dictatorship,
all institutions, including private companies, pay
generous attention to government instructions.
But in reality the state’s ability to influence private
decision-making is limited, in spite of the repressive
means at its disposal. In South Korea or Taiwan
the regimes could set directions because they
controlled credit and capital-flows, and because they
– and only they – facilitated access to foreign markets.
The amount of foreign direct investment in their
industrialisation processes was miniscule, their credit
companies were under state control, and their main
firms invested nationally for export abroad. In China
these crucial aspects of industrialisation are turned
upside down. Foreign investment has driven significant
parts of the process, foreign banks are operating in
China and Chinese banks have plentiful means to
resist government pressure, and the biggest Chinese
companies have already become multinationals with
large investments abroad. The domestic Chinese
growth process since 1990 has not been governed
by national priorities or five-year plans, but by the
chaotic interplay of market forces. All of this has
happened while the state has kept its investments in
profitable industries, owning or part-owning many
of China’s biggest companies. But, as one economic
planner told me recently, state-owned companies are
increasingly behaving like privately-owned companies
in the market; they recruit their managers from the
same pool of talent and they are equally responsible
for profits and losses. They may listen to what the
government says, but only if it provides a sound
bottom-line for their company.
At the moment quite a few global investors and
corporate executives agree that China will re-invent
global capitalism rather than ruin it. In the wake of the
crisis of 2008/09, Chinese officials and businessmen
alike began lecturing Western countries on the need
for market and currency stability, and for avoiding
corporate greed, bad loans, excessive deficits, and
extravagant consumption. Some of this sounds
laughable, given the amount of bad business practices
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in China itself. But it does signal that many elite
Chinese now see themselves as stakeholders in an
international economic system, on the success of which
their futures depend. Many people in China (and quite
a few outside) dream about a future Sino-capitalism
that will be better organised, more balanced, and less
destructive than its Western inspirators. So far there
is little that tells us that will be the case. But, as has
often happened in the world economy before, those
who are the generators of global growth innovate
as well as imitate. Future Chinese leaderships, public
and private, may be stimulated by the crises they
have gone through to opt for more regulation and
government design than we have seen in previous
versions of world capitalism.
China’s international position in the 21st century will
be determined as much by what happens inside China
as what happens outside its borders. The country’s
biggest domestic problem is that uneven growth
has left large regions behind and that the lack of a
proper welfare system and protection for workers
against exploitation has led to an extremely high
level of inequality. While Premier Wen and others
are lambasting the West for its excesses, inequality
in China is at least twice as high as in the United
States or Britain, with higher ratios to relatively
equal societies such as Germany or France. While
slowly and uncertainly trying to deal with its worst
consequences – for instance by re-introducing some
forms of subsidised education and health care – the
Chinese government is defending itself by continuing
The 2008/09 global financial crisis also showed a
China that had arrived as a key player in the world
economy. At the World Economic Forum in Davos in
2010, Chinese Premier Wen Jiabao placed the blame
for the crisis on the ‘inappropriate’ macroeconomic
policies of Western countries ‘and their unsustainable
model of development characterised by prolonged low
savings and high consumption; excessive expansion
of financial institutions in a blind pursuit of profit;
lack of self-discipline among financial institutions
and rating agencies and the ensuing distortion of
risk information and asset pricing; and the failure
of financial supervision and regulation to keep up
with financial innovations, which allowed the risks
of financial derivatives to build and spread.’ Quite a
handful: the apprentice was taking the past masters
to task for their excess. But the medicine the CCP
itself prescribed did not imply that there was anything
wrong with capitalism as such; instead it implemented
the largest stimulus program of government spending
in history, thereby attempting to stave off the worst
consequences of the crisis for Chinese companies
and for the Chinese population. Post-crisis growth
for China will most likely not be of the same scale
as before, because of international competition and,
eventually, the country’s aging population. But even
with ‘only’ six percent annual growth on average,
China will probably still become the world’s largest
economy sometime in the mid 2030s.
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to make the argument that ‘a rising tide lifts all boats’.
The problem is that there are no signs that Chinese
inequality is abating; on the contrary, the situation
in the poorer regions is getting worse and worker
unrest over low pay and atrocious working conditions
in many factories is on the increase.
In spite of receiving credit for China’s overall economic
growth, there is little indication that the CCP as a party
is capable of dealing with some of the social tensions
this growth is creating. The party’s steady refusal to
allow increased political pluralism, which could have
acted as a safety valve against discontent, will make
Chinese politics more unsettled over time. The CCP
today is unable to act with massive brutality against its
own urban population, as it did during the Mao era,
not least out of fear that such atrocities could unsettle
the country’s economy. A leading party member told
me that he thought that even a repeat of 1989 would
be unthinkable now – ‘just imagine,’ he said, what
would happen to the country’s credit rating!’. But
at the same time the party’s leaders gamble all on
economic growth keeping their people from taking
action against them. Such gambles rarely pay off.
A main reason why China is viewed with such suspicion
abroad is that it is led by a Communist party. But
today’s Chinese regime is a far cry from Communists of
the past. In reality, the regime itself has become much
more like what Taiwan or South Korea were before
democratisation – authoritarian, and sometimes ugly
and brutal, but not capable of atrocities on the scale
of those of the past, even in its own defence. While
it is impossible to predict what will happen in Chinese
politics, I would not be surprised if China follows a
similar pattern of democratisation to the other main
states in the region, only stretched out over a longer
period of time. Whatever happens, the CCP will not
be around forever, and those foreign observers who
today equate the party with the country are making a
major mistake: history shows that China is as capable
of political change as it has recently been of economic
and social change, and there is no set of engrained
‘values’ or ‘attitudes’ that will necessarily put the
country at odds with its neigrbours or with the West.
As before in its history, China’s direction will ultimately
be a matter of its leaders’ political choice.■
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